Budget reform could save $30bn a year

The audit commission has urged the Abbott government to scrap former treasurer
Wayne Swan
’s failed 2 per cent spending cap, saying the focus should be on forcing the government to “cut its cloth" by limiting taxes and reducing net debt instead.

The departure from a firm cap would give the government scope to allow spending growth to rise above that level from time to time, partly to compensate for temporary swings in economic growth.

The proposal comes as cabinet prepares to introduce a temporary income tax hike in the May budget to close revenue shortfalls over the next few years.

Peter Crone
, chief economist for the National Commission of Audit, said he deliberately did not prescribe a spending cap in the report’s recommendations because it would put the government into an unnecessary fiscal straight jacket.

Rather, he said Canberra should stick to three basic budget rules: pull the balance back to a ­surplus of 1 per cent of gross domestic product by 2023-24; “substantially" reduce net debt over the next decade; and keep tax receipts below 24 per cent of GDP. They are at about 23.1 per cent now.

The audit commission’s preferred “reform" scenario foreshadows a gradual return to budget balance by 2018-19, driven by the 64 recommendations of its report.

If all were taken up, the commission expects savings would rise to as much as $30 billion a year by 2017-18, growing to $70 billion by 2023-24 – or about 10 per cent of total outlays.

Additional boost

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However, the government would receive an additional boost – one that could be used to bring its target of a 1 per cent surplus forward by ­several years – thanks to interest savings of as much as $20 billion a year in 2023-24, because the Commonwealth would have lower net debt.

The report calls for the Parliamentary Budget Office to be given the ­formal job of tracking government decisions against the key fiscal rules.

Amending the Charter of Budget Honesty would also be required to give the budget office the task of reporting progress against the government’s medium-term strategy after the release of the final budget outcome each year.

Other measures to improve the transparency of the budget would be making it mandatory for every Budget and Mid-Year Economic and Fiscal Update to include 10-year projects on receipts and spending.

It recommends that Treasury’s regular Intergenerational Report be released after every national census, and should cover state and ­territory budgets.

It calls for greater “sensitivity ­analysis" in the budget, which would show the vulnerability of key economic forecasts to reduce missed estimates.

Publish hitherto secret rules

The commission says the gov­ernment should regularly publish hitherto secret rules that determine how departments do costings, ar­guing that doing so would improve transparency.

“Budget Process Operational Rules should be released publicly to enhance understanding of how budgets are framed," the com­mission said in the report.

In a sign the government plans to change the way it presents the budget this month, Treasurer
Joe Hockey
vowed on Thursday that he would ditch Labor’s practice of counting tax hikes as “saves", while also avoiding anything that weakens the economy.

“Our savings in the budget will do the hard yards," Mr Hockey said.

According to the commission, spending should be cut by 1.1 per cent in 2014-15 – or $4.6 billion – before growing 0.9 per cent and 0.8 per cent in 2015-16 and 2016-17 respectively.

After that, the report anticipates spending growth of 2.5 per cent through the rest of the 10-year period. Under this scenario, Commonwealth net debt would peak at 15.1 per cent of GDP in 2016-17 before declining to just over 5 per cent of GDP in 2023-24.

Shadow treasurer
Chris Bowen
rejected claims that Labor missed its spending cap, and said any budget projections that don’t include a spending cap are nothing more “than spin".